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4000 - Advisory Opinions
Does section 27 of the Federal Deposit Insurance Act preempt the
Michigan Motor Vehicle Sales Finance Act
FDIC--02--06 December 19, 2002 Rodney D. Ray, Counsel
This responds to your request on behalf of the X Association for an
opinion from the FDIC that section 27 of the Federal Deposit Insurance
Act (FDI Act) (12 U.S.C.
§ 1831d) preempts the Michigan Motor Vehicle Sales Finance
Act (Act) (M.C.L. §§ 492.101 et seq.), as interpreted by
the Michigan Department of Consumer and Industry Services, Financial
Institutions Bureau (Bureau), with regard to out-of-state banks
originating loans through motor vehicle dealers located in Michigan. I
have reviewed all of the information the X has provided, including a
copy of the Bureau's declaratory ruling, and other information that I
considered relevant to your request. In addition, for purposes of this
opinion, I have assumed the Bureau would reach a similar conclusion if
it were presented with the same facts based upon a request by an
out-of-state federally insured state bank.
Background
An Ohio-based national bank requested a declaratory ruling from the
Bureau, the Michigan agency responsible for administering the Act,
regarding the applicability of the Act to a lending program the bank
proposed to engage in with Michigan consumers for the purchase of motor
vehicles through bank agents located in the State of Michigan. Under
the proposed arrangement with the agents, the bank "would enter into
an agreement with a motor vehicle dealer in Michigan under which the
dealer would serve as [the bank's] limited agent for the purpose of
soliciting loans to finance motor vehicles, taking applications for the
vehicle loans, preparing loan documentation, and closing the loans by
obtaining the buyer's signatures on all required documents." The
bank would prescribe the loan terms, including the minimum interest
rate, but the dealer could, within a range established by the bank,
negotiate for a higher interest rate. The bank would pay the dealer a
commission (a yield-spread differential of zero to six percentage
points over the minimum interest rate established by the bank) on each
loan closed, and the bank would have no recourse against the dealer to
repurchase the loans, except for a cause of action for breach of agency
responsibilities.
In response to the request, the Bureau determined that the proposed
sales transactions constituted "installment sales" to Michigan
residents through automobile dealers in Michigan acting as the bank's
agents that were covered by the Act. Therefore, the Bureau determined
that where an entity utilized an agent to facilitate the making of an
installment sale, the agent was required to be licensed and to ensure
that the transaction was conducted in full compliance with the terms of
the Act. 1
Additionally, the Bureau ruled that an agent who facilitated the making
of an installment sale contract on behalf of an unlicensed entity, or,
regardless of whether the entity was licensed, if the transaction did
not comply with the Act, would be subject to an administrative
enforcement action as well as any applicable criminal
penalties.
{{12-31-03 p.4984.68}}
After the Bureau's ruling was issued, two Ohio-based national banks
asked the Office of the Comptroller of the Currency (OCC) for a
determination that the Act, as interpreted and applied by the Bureau to
out-of-state national banks and motor vehicle dealers originating motor
vehicle loans at dealership locations as third-party agents for
out-of-state national banks, was preempted by various provisions of the
National Bank Act. The Chief Counsel of the OCC responded to the
request, concluding that, to the extent the Bureau interpreted the Act
to limit the banks' proposed vehicle financing arrangement, the
Michigan statute would be preempted by 12 U.S.C. §§ 24(seventh), 85,
484, and OCC regulations. 66 Fed. Reg. 28593 (May 23, 2001).
The X submitted a similar request to the FDIC for a preemption
determination under section 27 of the FDI
Act. 2
Discussion
Congress enacted section 27 of the Act as part of section 521 of the
Depository Institutions Deregulation and Monetary Control Act of 1980
(DIDMCA), Pub. L. 96-221, 94 Stat. 132 (1980). The purpose of the
amendment was to provide federally insured state banks authority to
loan money to customers at rates that were competitive with those
authorized for national banks under section 85 of the National Bank
Act. The statute reads as follows:
(a) Interest rates
In order to prevent discrimination against
State-chartered insured depository institutions, including insured
savings banks, or insured branches of foreign banks with respect to
interest rates, if the applicable rate prescribed in this subsection
exceeds the rate such State bank or insured branch of a foreign bank
would be permitted to charge in the absence of this subsection, such
State bank or such insured branch of a foreign bank may,
notwithstanding any State constitution or statute which is hereby
preempted for the purposes of this section, take, receive, reserve, and
charge on any loan or discount made, or upon any note, bill of
exchange, or other evidence of debt, interest at a rate of not more
than 1 per centum in excess of the discount rate on ninety-day
commercial paper in effect at the Federal Reserve bank in the Federal
Reserve district where such State bank or such insured branch of a
foreign bank is located or at the rate allowed by the laws of the
State, territory, or district where the bank is located, which every
may be greater.
(b) Interest overcharge; forfeiture; interest payment
recovery
If the rate prescribed in subsection (a) exceeds the
rate such State bank or such insured branch of a foreign bank would be
permitted to charge in the absence of this section, and such State
fixed rate is thereby preempted by the rate described in subsection
(a), the taking, receiving, reserving, or charging a greater rate of
interest than is allowed by subsection (a), when knowingly done, shall
be deemed a forfeiture of the entire interest which the note, bill, or
other evidence of debt carries with it, or which has been agreed to be
paid thereon. If such greater rate of interest has been paid, the
person who paid it may recover in a civil action commenced in a court
of appropriate jurisdiction to later than two years after the date of
such payment, an amount equal to twice the amount of the interest paid
from such State bank or such insured branch of a foreign bank taking,
receiving, reserving, or charging such interest.
Several states, like Michigan, have enacted statutes regulating
installment sales transactions, but the FDIC's Legal Division has not
previously addressed the extent to which such laws may be preempted by
section 27.
{{12-31-03 p.4984.69}}
The United States supreme Court has employed three types of
preemption analysis to determine when state law is preempted under the
Supremacy Clause of the
Constitution. 3
First, explicit preemption can occur when Congress, in enacting a
federal statute, has expressed a clear intent to preempt state law.
Second, field preemption can be found when it is clear, even absent
explicit preemptive language in a federal statute, that Congress
intended, by legislating comprehensively, to occupy an entire field of
regulation and has thereby "left no room for the States to
supplement" federal law. Finally, conflict preemption can occur when
compliance with both state and federal law is impossible, or when the
state law "stands as an obstacle to the accomplishment and execution
of the full purposes and objectives of Congress." Capital
Cities Cable, Inc. v. Crisp, 467 U.S. 691, 698--699 (1984);
Hillsborough County, Florida v. Automated Medical Laboratories,
Inc., 471 U.S. 707, 713 (1985); Barnett Bank of Marion
County, N.A. v. Nelson, 517 U.S. 25, 31 (1996).
While section 27 contains an explicit preemption clause, unlike
section 85, the Bureau's ruling appears to avoid its reach. That
clause preempts state constitutional or statutory interest limitations
if the interest rates authorized by section 27(a) exceed the rate that
would be permissible in the absence of the subsection. The Bureau's
opinion, however, is directed primarily toward determining whether the
proposed financing transaction constitutes an "installment sale"
under the Act and, if so, the obligations imposed by the Act on the
Michigan agents. The opinion does not say that the interest rate
out-of-state federally insured banks involved in such transactions can
legally charge Michigan residents is subject to Michigan usury
limits. 4
Therefore, the Bureau's ruling appears to address issues that fall
outside the coverage of the explicit preemption clause contained in
section 27.
Even if explicit preemption does not exist, however, state law can
be preempted where it stands as an obstacle to the accomplishment of
the full purposes and objectives of
Congress. 5
This inquiry requires consideration of "the relationship between
state and federal laws as they are interpreted and applied, not merely
as they are written." Jones v. Rath Packing Co., 430 U.S.
519, 526 (1977).
In considering how the Michigan statute is interpreted and applied,
the most significant aspect of the Bureau's ruling, for purposes of
this analysis, is the following paragraph:
IT IS ALSO MY RULING that where an entity has
engaged an agent to facilitate the making of an installment sale
contract, the agent must not only be licensed under the Act, but must
ensure the transaction is conducted in full compliance with the
Act. 6
Where such agent has either facilitated the making of an installment
sale contract on behalf of an unlicensed entity, or, regardless of
whether the entity is licensed, if the transaction does not comply with
the Act, the agent will be subject to an administrative enforcement
action as well as any applicable criminal
sanction. 7
(Emphasis added).
To appreciate the impact of this statement, a brief overview of some
of the Act's provisions is helpful.
The Act became law in 1950. Its preamble describes it as defining
and addressing numerous aspects of installment sales transactions,
including the prescribing of conditions under which installment sales
can be made and regulating the financing of such sales.
It
{{12-31-03 p.4984.70}}also is described as
". . . limiting charges in connection with [installment sale
instruments] and fixing the maximum interest rates for delinquencies,
extensions and loans . . .". Section 2 of the Act defines a
"sales finance company" to include a financial institution that
engages as principal in the business of financing installment sales
contracts between other parties. This definition would presumably cover
an out-of-state federally insured depository institution that opted to
be covered by the Act. 8
Section 3 of the Act requires installment sellers and sales finance
companies to be licensed under the Act. As part of the licensing
process, applicants are required to designate an authorized agent in
Michigan for service of process or other legal notices and provide a
bond conditioned upon compliance with all of the provisions of the Act
and the Bureau's rules and regulations. Judgment creditors of a
licensee who are aggrieved by the licensee's actions can maintain an
action for payment from the bond, and the Bureau has authority to
revoke or suspend an applicant's license if the license violates the
provisions of the Act.
Section 15(a) of the Act, on which the Bureau significantly relied
in reaching its decision, prohibits the sale of an installment sales
contract to any person doing business in the State of Michigan without
a license under the Act. Sections 18--20 specify that finance charges
on the contracts, extensions or renewals by holders of the contracts,
and default charges are limited by various provisions of the Act to the
amount permitted by the Michigan Credit Reform Act. Those sections also
specify how finance and default charges are to be calculated and
collected, and section 31 prohibits charging amounts that are not
authorized under the Act. If a seller or subsequent holder receives
prohibited charges and costs under the contract, section 31 provides
that all of the costs and charges in connection with a contract, other
than insurance, are void and unenforceable and requires that any
amounts paid by the buyer for such charges, other than insurance, must
be applied on the principal of the contract. Finally, section 37(a)
subjects any person, including an agent, to criminal penalties for
wilfully or intentionally engaging in business as an installment seller
or sales finance company without having obtained a license and
subsection (b) subjects licensees, including agents, who willfully or
intentionally violate any provision of the Act to criminal sanctions.
Thus, under the Bureau's interpretation of the Act, the ability of
an out-of-state federally insured state bank to legally make motor
vehicle loans to Michigan residents utilizing lender agents located in
Michigan, would be conditioned upon the institution subjecting itself
to the Michigan regulatory scheme. Under that regulatory scheme, the
lender is required to charge and collect interest on the contracts as
provided under Michigan law. In addition, by subjecting itself to the
Michigan regulatory scheme, Michigan law dictates the remedies that
would be applicable if such institution charges an amount not
authorized under the Act.
Section 85 of the National Bank Act was enacted to protect national
banks from discriminatory state legislation by specifying the interest
that national banks could charge their customers. Following its
enactment, the courts construed the statute to afford national banks
authority to charge the highest rates authorized for any competing
institution in the state where the national bank was located and to
"export" those rates to borrowers residing in other states
without regard to usury restrictions imposed by the borrower's state
laws. As a result of the considerable interest rate flexibility
provided by the statute, federally insured state banks, whose loans
remained subject to lower state usury limitations, were placed at a
competitive disadvantage with national banks. The high interest rate
environment that
{{12-31-03 p.4984.71}}existed in the United States in the
1970s highlighted this problem and members of Congress became concerned
that the continued viability of the nation's dual banking system might
be adversely effected because state-chartered banks in states with low
interest rates, such as Arkansas, could not compete with national banks
for loan customers and maintain their
profitability. 9
To address this situation and provide competitive lending equality to
federally insured state banks, Congress enacted section 27 as part of
the DIDMCA of 1980, which gave federally insured state banks virtually
the same interest rate authority and usury remedies that national banks
had enjoyed for more than a century.
To achieve its goal of providing federally insured state banks
competitive lending equality, Congress modeled section 27 after
sections 85 of the National Bank Act. Because section 27 borrowed key
language 10
and concepts from section 85, the FDIC and the courts have recognized
that it should be construed in para materia with similar
provisions under the National Bank Act. Thus, for example, the interest
rate exportation authority the Supreme Court recognized in
Marguette for national banks was also provided to federally
insured state banks when section 27 was enacted. Greenwood Trust
Co. v. Commonwealth of Mass., 971 F.2d 818, 826--828(1st Cir.),
cert. denied, 506 U.S. 1052(1993).
In addition to giving federally insured state banks the same ability
to export interest rates that national banks enjoyed under section 85,
Congress borrowed and incorporated key language and concepts from
section 86 of the National Bank Act into section 27(b) to fashion a
corresponding usury remedy. As is true of section 85, Congress'
incorporation of key language and concepts from section 86 into section
27(b) brought with it the judicial interpretations of the former
section 11
and, thus, section 27(b) is the exclusive remedy for usury violations
against a federally insured state bank. Hill v. Chemical
Bank, 799 F. Supp. 948 (D. Minn.
1992). 12
This authority can not be exercised, however, under the Bureau's
interpretation of the Act, because the agent is required to ensure that
the transactions it engages in are in full compliance with the Act. To
be in compliance with the Act, the out-of-state federally insured state
bank would have to be licensed under the Act, otherwise the transaction
would run afoul of the section 15(a) proscription against selling the
contracts to anyone doing business in Michigan without being licensed
under the Act. To be license under the Act, however, the out-of-state
federally insured state bank would have to post a bond conditioned upon
compliance with all of the provisions of the Act, which would include
the Michigan interest limitation and the Michigan remedies for
violation of the statute.
Thus, the Bureau's ruling appears to require that an out-of-state
federally insured state bank must subject itself to compliance with all
of the laws of the State of Michigan governing installment sales
transactions, even though it has been granted authority to
do
{{12-31-03 p.4984.72}}otherwise with regard to certain
provisions of the Michigan statute by federal law. Such an
interpretation stands as an obstacle to the accomplishment and
execution of Congress' full purpose and objective of providing
federally insured state banks competitive lending equality with
national banks and should be preempted. The potentially
disproportionate negative impact of the Bureau's ruling on
out-of-state federally insured state banks is also highlighted in this
instance by the fact that the OCC has determined that the Act, as
applied by the Bureau, with regard to out-of-state national banks and
their agents in Michigan is preempted by section 85 to the extent the
Bureau interprets the Act to subject national banks to Michigan
interest limitations.
The Bureau might argue that its ruling does not improperly attempt
to restrict the federal authority Congress has provided out-of-state
federally insured state banks because its ruling is only directed to
policing the actions of bank agents in Michigan and does not address
the out-of-state banks themselves. The Bureau's ruling affects the
lending authority of out-of-state banks by implication, however,
because it specifically provides that the lender's status as a
national bank does not mean that entities entering into agency
engagements with the bank may do so without complying with the
licensing requirements of the Act and imposes compliance obligations,
coupled with the threat of potential administrative and criminal
sanctions, on the Michigan agents. Therefore, although the involvement
of an out-of-state national bank in the transaction was recognized, the
ruling did not reconcile the Act's licensing and compliance
requirements with the lending authority provided to the bank by federal
law. I believe, particularly if the Bureau were confronted with the
same situation involving an out-of-state federally insured state bank,
that the better approach would be to interpret and apply the federal
and state provisions in a way that gives meaning to the state law but
also avoids frustrating the Congressional objective and purpose for the
enactment of section 27.
Conclusion
Based upon the facts presented and the foregoing legal analysis, I
believe that the Act as interpreted and applied by the Bureau is not
preempted by section 27, except to the extent out-of-state federally
insured state banks making loans to Michigan residents through Michigan
agents would be required to comply, either directly or through their
Michigan agents, with the Michigan interest limitations and remedies
contained in the Act.
I apologize for the delay in responding to this request and
appreciate X raising this matter with us. Please be aware, however,
that the law regarding the use of agents by banks to make loans to
out-of-state borrowers at interest rates allowed by the state where the
bank is located is still being analyzed and developed by the courts.
Therefore, this opinion is being provided for your information and only
represents the views of the staff of the Legal Division based upon the
facts stated in the opinion. It does not, however, constitute a binding
decision by the FDIC or its Board of Directors on these
issues.
1Although the Ohio-based national bank characterized the
proposed arrangement as a "direct lending program," the Bureau
found, based on a Michigan Court of Appeals opinion and information
contained in the briefs filed by the parties therein, that the
arrangement more closely resembled an "installment sales
contract" transaction than a "direct loan" transaction, making
it subject to the Act. For purposes of this opinion, it is assumed that
the Bureau's determination that the arrangement at issue constituted
an installment, sales contract transaction was correct. Otherwise, as
indicated in the Bureau's ruling, if the arrangement constituted a
direct loan transaction, it would not be subject to the Act. Go Back to Text
2The X is a national trade association for market-funded
providers of financial services to consumers and small businesses. X's
request states that it is submitted on behalf of its members that own
state-chartered federally insured banks and industrial loan and thrifts
that rely on federal preemption under section 27 when making direct
loans to residents of other states. Go Back to Text
3U.S. Const. art. VI, cl. 2. Go Back to Text
4In its opinion, the Bureau appears to agree with National
City's observation that the Act "was enacted to limit the rate and
terms under which a motor vehicle dealer could sell an
automobile. . ." and indicates that looking through the form to
the substance of the transaction "is important not only for uniform
administration of the Act, but to further Michigan's public policy of
encouraging the sale of retail goods on credit while placing strict
usury limits on outright loans of money." Go Back to Text
5As previously indicated, preemption can also be found where
Congress legislates comprehensively to occupy an entire field of
regulation or when compliance with both state and federal law is
impossible. Neither of these bases for preemption are being addressed,
however, because the Act, as interpreted and applied by the Bureau,
stands as an obstacle to the accomplishment of the full purposes and
objectives of Congress. Thus, it is unnecessary to address additional
alternative bases for preemption. Go Back to Text
6Citing sections 12--34 of the Act (M.C.L.
§§ 492.112--492.134). Go Back to Text
7Citing sections 9 and 37 of the Act (M.C.L. §§ 442.109,
492.137). Go Back to Text
8Although not entirely free from doubt, this conclusion is
based upon the fact that the Act also defines a "financial
institution" as including a state or nationally chartered bank that
elects to come under the provisions of the Act. In the past,
the Michigan Attorney General has construed that language as giving
national banks the option to elect coverage under the Act for purposes
of obtaining installment sales contracts from licensed sellers. Op.
Atty. Gen. No. 1516 (February 27, 1952). The Attorney General's
Opinion does not, however, specifically address the application of the
Act in the context of an out-of-state national bank and it was issued
prior to the Supreme Court's ruling in Marguette Nat'l Bank of
Minneapolis v. First of Omaha Service Corp., 439 U.S. 299 (1978)
(national bank may charge out-of-state customers interest allowed by
the state where the bank is located pursuant to section 85 of the
National Bank Act). Go Back to Text
9See, e.g., 125 Cong. Rec. S15684 (daily ed.
November 1, 1979) (statements of Senators Pryor and Bumpers). Go Back to Text
10For present purposes, it is important to note that section
27, like section 85, specifically allows the lender to charge interest
"at the rate allowed by the laws of the State . . . where the
bank is located." Go Back to Text
11Prior to the enactment of section 27 it was recognized that
section 86 of the National Bank Act provided the exclusive remedy for
usury by a national bank. First National Bank of Mena v.
Nowlin, 509 F.2d 872 (8th Cir. 1975). Go Back to Text
12the Hill decision relied, in part, on the Eighth
Circuit's decision in M. Nahas & Co. v. First Nat'l Bank of Hot
Springs, 920 F.2d 608 (8th Cir. 1991) to hold that section 27
completely preempts the field of usury claims against federally insured
state banks. Recently, in Anderson v. H & R Block, Inc.,
287 F.3d 1038 (11th Cir. 2002), the United States Court of Appeals for
the Eleventh Circuit disagreed with the Eight Circuit's decisions in
Nahas and a subsequent case, Krispin v. May Department
Stores Co., 218 F.3d 919 (8th Cir. 2000), on whether section 86 of
the National Bank Act completely preempts state law usury claims. Each
of these cases involved the removal of state court actions to federal
courts, and the disagreement between the two circuits involves a
question of whether a defense based upon section 86 is covered by the
"complete preemption" doctrine, which provides an exception to
the well-pleaded complaint rule. If the defense completely preempts
state law, removal to the federal courts is appropriate, but if the
remedy under the federal statute constitutes an "ordinary
preemption" defense, it can be asserted in state courts and will not
support removal of the action to the federal courts. While the two
circuits disagree on whether section 86 completely preempts state law
usury claims for purposes of federal court removal jurisdiction, the
Eleventh Circuit does not appear to disagree with the Eight Circuit's
conclusion that section 86 is the exclusive remedy for usury claims
against a national bank. See, Anderson, 1046,
n. Go Back to Text
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